Entrepreneurs And Small Balance Real Estate: A Great Match-Up

Larger “trophy” properties in big cities have certainly benefited from the recent strong real estate market, but recently the bigger story has been about places like San Antonio, Charlotte, and Nashville and smaller commercial properties -- a perfect area of focus for entrepreneurs.

The secret behind the popularity of some secondary markets lies in the fact that those cities can offer many of the same perks as larger cities like New York or L.A. – but without the higher price tag. Cities with plentiful entertainment options that facilitate people being able to walk or bike to businesses and parks are collectively bringing in new renters and buyers in both residential and commercial markets. Cap rates (income-price multipliers) in these cities have also remained on a relatively even keel, so that opportunities for investors are still available.

The sector is clearly more amenable to smaller real estate entrepreneurs. It’s more accessible, as the dollar requirements are smaller. But it’s also more interesting (more profit potential), since the big players often overlook the small balance space. It’s a sector ripe for small businesses looking to make a mark.

While individual properties can sometimes be riskier if they are based on only a few tenants, in other respects the small balance market seems to exhibit some degree of stability. “The prices in the small cap CRE (commercial real estate) domain don’t have the same peaks and valleys as the large CRE market,” said Randy Fuchs, principal at Boxwood Means, a research group that surveys trends in smaller commercial properties.

Record-low vacancies and recurring gains in leasing demand would seem to assure another solid year for the small balance space. Rents for small cap warehouse and flex buildings are doing particularly well, with office and retail rents also on the rise, albeit at a more modest pace.